Why is the notion of a trend
One of the key tenets of Dow
Once a trend is in place,
then it is likely to remain in place; and
This is very important, and it is a fundamental principle that
underlines a lot of the success in the market.
trend continues to exist until it is confirmed to have
Why is it so important or useful? Because if we can identify a
share price rising trend for a stock, and buy some, we can ride
It applies to the uptrends, which the average investor /
trader might ride, as well as to the downtrends which
many investors and traders hope to avoid. See more details about
this in the material below.
information about Dow Theory,
see the More Information
list at right, and also see
information here about Dow Theory.
Rule (in 3 Times)"
Any stock or index will always be trading
in one of 3 "ways":
This is a simple re-statement of one tenet of Dow Theory;
but it is a
useful way to remember a simple fact about the price chart. That
chart will show an uptrend,
or a downtrend,
- in an uptrend, or
- in a downtrend, or
- there will be no trend.
See more information about the 3Ways Rule.
Why avoid a downtrend?
It is important to avoid the downtrends, because they
are likely to continue. When a share price is falling, many people
are tempted to purchase it because it seems to be cheap. And many
commentators and brokers might recommend to buy it because the
share price offers great value. But how do we define great
value? Well, this is very subjective (read more about this topic here).
Because a downtrend is likely to continue, many investors /
traders will not buy the stock until the downtrend is confirmed to
have ended, and a new uptrend has started. Exactly how to do this
depends on a few things, including the time period of the charts
that you study (ie. weekly, daily, hourly, etc.).
How to spot a trend
There are a number of ways to spot an up-trend:
simplest eye-ball call
On a price chart, if the price starts in the bottom
left corner and finishes in the top right corner, it must be
up (as in the sample at right - click on the image for a
Higher Peaks and Higher Troughs
A rising trend is described in classical Dow Theory
series of Higher Peaks and Higher Troughs, or as Higher Highs
Higher Lows. This is demonstrated in the sample chart at
where each Higher High is denoted with "HH" and
each Higher Low with "HL". The terms "higher peak" and "higher
are also in common use in reference to a rising trend.
However, in the
strict use of the terminology, there is a different between
and lows" and the "peaks and troughs".
- Trend Line
a price moves higher, it may be possible to place a rising
line under the share price (as in the chart image above). This
appears to act as a "floor" to support rising prices. As long
price stays above the trend line, then the up-trend is said to
place. Once the price breaks below the trend line, then the
said to have failed.
We can use a Moving Average chart indicator on the price chart
indicate whether a price is "trending" up or down (or not at
the sample Monthly
price chart at right (click on the image for a larger
Moving Average (MA) is shown as a blue line. It can be
where the MA is rising, the stock is also tending to rise (ie.
uptrending). Conversely, a falling MA suggests the stock is
down. Of course, the
picture might be different on a weekly or daily chart, and the
of periods we use in the MA indicator can also make a
difference. For a
realistic example of using this idea to spot rising trends,
Weekly Watch List
The health and strength of a trend - MMA
strength of a trend can be
quickly determined using a number of different technical analysis
tools, including the Multiple Moving Average
(MMA) indicator on the price chart.
There are more than a couple of these in existence in good
software packages including the Guppy MMA (or GMMA for short) and
The sample chart at right is the same chart as shown in the MA
above, except that this time a Guppy MMA indicator is included. At
glance, this indicator looks complex; but it is not. It is
12 MA lines - a group of 6 blue ones, and a group of 6 red ones.
the trained analyst, this
is very helpful in telling us about the health and nature of a
(the mood and sentiment).
See a sample use of the GMMA in Robert's
tools for determining trend strength include: the simple trend
simple linear regression line, Alan Hull's ROAR indicator and the
information, see the eBook Articles listed above right.
How to quickly find a trend with
If you are using good charting software, with a
good scan tool, then it is not hard to quickly scan through a long
of stocks and display a short list of the stocks that currently
the characteristics of a trend.
One good software tool is BullCharts,
where it is possible
create a scan to search for trending stocks. Brainy's eBook (PDF)
Article BC-10-400, "Scans - Match (not) all criteria"
2), discusses this.
And a down-trend...
is not only up-trends in which we are
interested; but also down-trends. If we feel that a stock in a
down-trend is over-sold and potentially a great bargain, we can
the price chart for a confirmed break of the down-trend. And those
people who are happy to short-sell a stock, can look for confirmed
trends, and sell into the down-trend.
visually spot a down-trend on a price chart, we look for the
of the signs of an uptrend - a series of Lower Highs and Lower
Lower Peaks and Lower Troughs).
Case Study - NAB
A down trend is demonstrated in the weekly price chart of National
Bank (NAB) at right from late 2007 until mid-2009 (click on the
for a larger image). NAB fell 61% from $43 to $16 over a 16 month
period during the so-called infamous GFC (btw - imagine a blue
stock falling 61%!). The comments on the chart at right explain
down-trend line, and the observed break-out in March 2009.
this chart of NAB we have placed a downward straight line above
price action, and it appears to act as a ceiling to prevent prices
rising. Once the price does break above the down-trend line, it
said that the trend is over (as indicated toward the end of this
Case Study - MYR
chart at right, we can see two periods of uptrends (indicated with
green arrows) over the 8 years or so since the Myer IPO in 2009.
for the rest of the time, the share price was in a downtrend. We
easily see a sequence of Lower Peaks and Lower Troughs across most
Trends in multiple time frames
The discussion above is kept
simplistic for introductory purposes. However, it is important to
continue the study of trends in order to consider price trends
multiple time frames. This differentiates from trends in the short
term, from a very likely different trend in the medium term, and
next level of study involves the consideration of the highs and lows
the candlesticks or bars, as well as the existance of peaks and
on different period charts, such as the daily versus weekly versus
For more information on this, see Trends in multiple time frames
(restricted access to Toolbox Members only).
For more details about Trends,
how to spot them, and how to use them, see the Share Market Toolbox
links at the top of the column at right.
Case studies - in numerous
articles published by The
Age (Fairfax press), and the ASX.
Articles - Share
Market Toolbox Members can see more details in the following eBook
(Toolbox non-Members can see the "Page 1" of these Articles from the
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Any special terms that might be used in the text at left, can
be found discussed in the Toolbox somewhere. Perhaps
in Brainy's eBook Articles - see the Master
Index list for details. Or, search
the eBook Articles.
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